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Student Loan Repayment Options

At one time, there was only one student loan repayment option—the standard 10-year plan. Now, there is an assortment of flexible repayment options to help borrowers meet their loan obligations. And it couldn't have come at a better time. According to an analysis of the government's National Postsecondary Student Aid Study by financial aid expert Mark Kantrowitz, the average federal student loan debt load was $23,186 last year—a figure that doesn't include private student loan debt, which has exploded in recent years along with the cost of college.

Standard plan

Under a standard repayment plan, you pay a certain amount each month over a 10-year term. If your interest rate is fixed, you'll pay a fixed amount each month; if your interest rate is variable, your monthly payment will change from year to year (but will be the same each month for the 12 months that a certain interest rate is in effect).

Graduated plan

Under a graduated repayment plan, payments start out low in the early years of the loan (presumably when a new college graduate has the lowest earning potential), then increase in the later years of the loan. With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans, the initial lower payment includes interest only.

Example: Assume you have a $20,000 student loan at a fixed 6.8 percent interest rate. Under a standard 10-year repayment plan, your monthly payment would be $230, and your total payment over the term of the loan would be $27,619, of which $7,619 is interest payments. Under a graduated 10-year repayment plan, if you chose a 4-year interest-only option, your monthly payment would be $113 for the first 4 years, then $339 for the remaining 6 years, for a total payment over the term of the loan of $29,852, of which $9,852 is interest payments.

Extended plan

Under an extended repayment plan, you extend the time you have to pay the loan, typically anywhere from 15 to 30 years. Your monthly payment is lower than it would be under a standard plan, but you'll pay more interest over the life of the loan because the repayment period is longer.

Example: Assume the same facts as before—a $20,000 loan at a fixed 6.8 percent interest rate. Under an extended repayment plan, if the term were increased to 20 years, your monthly payment would be $153 (lower than the $230 monthly payment under the standard 10-year plan), but your total payment over the term of the loan would be $36,640—$9,021 more interest than under the standard plan.

Income contingent plan

An income contingent repayment plan is for federal student loans (including graduate Direct PLUS Loans) made under the government's William D. Ford Direct Loan program only. Monthly payments are based on the student's income, family size and amount of loans. After 25 years of repayment (not counting time spent in deferment or forbearance), any remaining balance on the loans will be discharged (you may have to pay taxes on the amount discharged, however). A public service loan forgiveness component will discharge any remaining debt after 10 years of full-time employment in public service. Borrowers with federal student loans obtained via private lenders under the Federal Family Education Loan program can ask their lenders about an income sensitive repayment option.

Income based repayment plan

The federal government's new Income Based Repayment (IBR) program went into effect July 1, 2009. Monthly payments are based on the student's income and family size. Borrowers pay 15 percent of their discretionary income to student loan payments, with any remaining debt forgiven after 25 years. According to Lauren Asher, President of the Project on Student Debt and the Institute for College Access and Success, a student will generally qualify if he or she owes about as much in federal student loans as the student's current annual salary.

This program is open to graduates with a Stafford Loan, graduate PLUS Loan or consolidation student loan made under either the Direct Loan program or the Federal Family Education Loan Program. The loans can be for undergraduate, graduate or professional studies, as well as for job training. The Department of Education has an IBR calculator on its website at http://studentaid.ed.gov.

And thanks to recent legislation, new borrowers who take out a federal student loan after July 1, 2014, will pay just 10 percent of their discretionary income to student loan payments, with any remaining debt forgiven after 20 years.